American Coastal Insurance: Navigating Rough Waters or Charting Calm Seas?

Let’s dive into American Coastal Insurance Corporation’s (ACIC) Q1 2025 results. The numbers are a mixed bag, but there’s a clear strategy at play here. Investors need to separate the noise from the navigation—because this is a company with both storm clouds and sunlit horizons.

First, the headline numbers: Net income fell 9.5% to $21.3 million, and EPS dropped to $0.43, down 10.4% from last year. That’s a red flag. But dig deeper: gross premiums jumped 7.2% to $197.85 million, and net premiums earned rose 9% to $68.27 million. Growth is happening, but at a cost.

The Expense Tsunami
The big problem? Costs. Policy acquisition expenses exploded by 144.8% to $23.5 million. Why? ACIC slashed its quota share reinsurance from 40% to 20%, effective June 2024. This move reduces ceded premiums but leaves the company holding more risk—and paying more in fees to acquire those policies. Meanwhile, the expense ratio surged to 48.3%, up from 33.3% a year ago. That’s a wake-up call.

But here’s the flip side: The combined ratio hit 65.0%, right on target. That’s a key metric for insurers—it means ACIC is pricing policies profitably before considering investment income. The CEO, B. Bradford Martz, is sticking to his 65% target, and investors should too.

The Reinsurance Shift: Risk vs. Reward
Reducing reinsurance is a gamble. By ceding less risk, ACIC keeps more premiums but assumes greater exposure to losses. The move did lower ceding commissions and boost net premiums, but it’s also why acquisition costs skyrocketed. Martz argues this is about long-term stability—balancing growth with risk retention. Let’s see if that pays off.

Underwriting Discipline: The Silver Lining
The underlying combined ratio (non-GAAP) rose to 68.2%, but that’s still below the 70% threshold many insurers target. Even better: net losses fell 8.8%, and the loss ratio dropped to 16.7% of net earned premiums. The company is tightening underwriting, focusing on account retention, and reducing concentration in high-risk policies. That’s smart.

The Investment Portfolio: Steady as She Goes
Investments grew to $568.8 million, with 84% in fixed maturities. The modified duration dropped to 2.0 years, meaning the portfolio is less sensitive to interest rate hikes. Meanwhile, book value per share jumped 26.5% to $5.40, thanks to retained earnings. That’s a critical win—book value is the foundation of insurance valuations.

The Sale of Interboro: A Clean Break?
ACIC sold its Interboro subsidiary for $26.5 million, cutting ties with a division that might have been a drag. This frees up capital and focus. The gain won’t hit earnings hard, but strategic pruning is always a good sign.

The Bottom Line: Invest with a Compass, Not a Crystal Ball
Here’s why I’m cautiously bullish:
- Premium growth is real (7.2% gross, 9% net).
- The 65% combined ratio is achievable if underwriting stays tight.
- Book value is rising, and the investment portfolio is conservative.
- The CEO’s focus on ROE (30%) and disciplined underwriting aligns with long-term value.

But the red flags are loud:
- Expense spikes (144% jump in acquisition costs) could crimp margins.
- The underlying loss ratio rose to 8.4%, signaling potential softening in underwriting discipline.
- Catastrophe risk remains—hurricanes or wildfires could blow up the combined ratio.

Investors should ask: Can ACIC control costs without sacrificing growth? The reinsurance strategy is a bet on better pricing power. If that works, the 65% target holds, and book value climbs. If not, expenses could sink profits again.

Final Take: A Buy for Patient Investors
At current levels, ACIC is a “hold” with upside potential. The premium growth and book value gains are solid, but expenses need to stabilize. Keep an eye on Q2’s expense ratio and loss trends. If Martz can navigate this cost storm, the seas ahead could be smooth.

Conclusion
American Coastal Insurance is charting a course between growth and risk. The premium expansion and disciplined underwriting are clear positives, but the expense surge and rising loss ratios are speed bumps. For investors willing to bet on management’s strategic pivot—and a little luck with Mother Nature—this could be a tide-turner. But tread carefully: The waves are still choppy.